Average endowment will see reversal of more than one full year of returns

How bad is the current investment environment? We looked at the average returns for NACUBO (National Association of College and University Business Officers) endowments over the last ten years and then extrapolated the returns from June 2019 through March 2020 using a 60/40 stock bond mix and then assuming that the second quarter will be down 10 percent for even a blended portfolio. The result is a sharp return reversal that will substantially impact endowments. If the endowment had a slightly higher equity focus, the returns will be even worse.

Instead of using excess returns to meet operating budgets, these institutions will have to dip into principal. These stark numbers are for the average or median fund. This performance decline will have clear carryover to operating budgets. Even small endowments should start to think out of the box for asset allocation. Breaking out of an asset class mindset and thinking about risk premia may be a good start although it will take effort to rewire portfolio thinking.